by Matt Doiron
The Walt Disney Company (DIS) narrowly beat analyst expectations on both top and bottom lines in the first quarter of its fiscal year, a quarter which ended in December 2012. The stock rose about 3% in after hours trading as while some elements of the TV business did lead net income 6% lower than a year earlier, a strong performance overall caused earnings per share to come in at 79 cents as opposed to consensus of 76 cents per share.
One of the biggest M&A deals of late 2012 was Disney's surprising announcement that it was acquiring Lucasfilm for $4 billion. At the same time, the company announced-- in what was less surprising, given that acquisition-- that it would be producing a third trilogy of Star Wars films. Now Disney has announced it will be making additional films tied into the same universe. This gives Disney the chance to broaden its appeal to an action-oriented audience among young adults, in contrast to its more traditional Disney Princesses universe. Of course, the film business joins Disney's TV properties (including ABC and ESPN), a global theme parks business, and more within a market leading entertainment company.
The Walt Disney Company trades at 17 times trailing earnings, which may be a bit high for a company which is seeing a slight fall in net income. Perhaps an improved movie business would offset continued struggles in TV, and we do like the prospects for the entertainment industry to achieve growth in the developing world, but it's possible that the company is fairly valued with these opportunities already priced into the stock. Wall Street analysts expect $3.86 in EPS for the fiscal year ending September 2014, implying a forward P/E of 14.
Billionaire Ken Fisher's Fisher Asset Management moved heavily into The Walt Disney Company during the third quarter of 2012, increasing its stake to a total of 8.6 million shares by the end of September (see Fisher's stock picks). Lone Pine Capital, which is managed by billionaire and Tiger Cub Stephen Mandel, cut its stake but still owned 9.4 million shares (find Mandel's favorite stocks). Fellow Tiger Cub John Griffin's Blue Ridge Capital initiated a position in Disney between July and September, reporting a position of almost 3 million shares (check out more stocks Blue Ridge was buying).
We can compare Disney to News Corp (NWSA), Time Warner Inc. (TWX), Comcast Corporation (CMCSA), the owner of NBC Universal, and CBS Corporation (CBS). Disney actually trades at a generally small discount to these companies: News Corp's trailing P/E is 26, while the other three peers are valued in the range of 18 to 19 times their trailing earnings. News Corp's premium is due to the fact that the company is set to be broken into two, the theory being that management of the new companies will be better able to focus on improving operations and so total earnings will see a one-time boost. While this is certainly a possibility, we think that News Corp is better placed on a watch list for now.
The other three media companies have a bit more of a spread when we look at their P/Es based on 2013 expectations. Comcast's current-year P/E is 18 as its earnings growth- which has been high recently- is expected to slow. We would be interested in seeing why that is the case, as recent trends have indicated that it is a potential growth stock. Time Warner and CBS have been experiencing little change in revenue, but at least some improvements on the bottom line; still, we would be skeptical in these cases that they would hit their earnings targets which imply earnings multiples closer to 13 or 14.
It's difficult to say if Disney's brand name and growth prospects make it a better buy than Time Warner or CBS, and it's certainly worth researching Comcast in our opinion. With earnings not on a good path and the stock certainly not a pure value in terms of its pricing, we would advise against buying the stock on pure growth opportunities right now unless company specific-factors were judged strong enough to favor it above its peers.